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74 Cards in this Set
- Front
- Back
- 3rd side (hint)
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Define assurance |
Described as assurance firms satisfaction. With reliability of assertion being made by one party for the use of another party. With either positive or negative conclusiom |
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What is an assurance engagement |
It's where practitioner expresses conclusion to enhance degree of confidence of intended users other than responsible party about outcome of evaluation of a subject matter against criteria |
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Key elements of assurance engagement (7) |
The practitioner - gives assurance The intended users - SH The responsible party - BOD, have to prepare subject matter and determine criteria A subject matter I.e Financial Statements Suitable criteria - Benchmark Standards Sufficient and Appropriate evidence Written report with opinion on subject matter |
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2 types of assurance |
Reasonable and limited |
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Describe reasonable assurance (3) |
Intrusive, detailed sufficient & appropriate Positive opinion "FS show true and fair view in all material aspects |
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Describe Limited assurance (3) |
S&A less intrusive Negative conclusion "nothing has come to our attention that subject matter is misstatement" |
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Can you give absolute assurance |
No |
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Why can't you give absolute assurance (4) |
Testing and Sampling - T oversee processes, S too expensive for everything to be included Reliance om Controls - Accounting system error, collusion could take place Nature of FS - may contain estimates therfore evidence is persuasive not conclusive Quality of Auditor Judgement - level of materiality, how much subject matter |
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Define true |
Factual conforms with standards and law. Data correctly extracted from the books |
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Define fair |
Free from discrimination and bias (estimates and judgement) |
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Legally have to be a member of RSB |
Recognised supervisory body, like ICAEW RSB responsible for making sure audits are done by Qualified people Individuals or firms monitored ICAEW - LTD FRC - PLC |
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Why is assurance important (3 sectors) |
SH - Independant, professional, verifcation 3rd Party - increase credibility and confidence in firm BOD - prevent fraud and errors improve (in form on Mngmt letter) |
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Threshold for audit exemption |
Turnover < 10.2m Assets <5.1m Employees <50 |
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What are objectives of planning an audit (6) |
Ensure appropriate attention Identify potential problems Ensure audit is properly organised Assign work to engagement team members Facilitate direction of supervision Facilitate review of work |
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What is the Audit Strategy |
Big plan, which sets scope, timing and direction of audit |
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What is audit plan |
More detailed sets out nature, timing and extent of audit procedures in order to obtain sufficient and appropriate evidence |
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What does audit strategy include (5) |
Understand the entities: Business Environment A accounting and internal control systems Materiality and risk (Where to focus) Resources |
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What is the objective of the auditor as stated in ISA 315 |
To identify and assess risk of material misstatement due to Fraud or error of the FS and assertion levels, by understanding the entity and its environment |
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Why do we understand entity and its environment |
To identify risk which helps direct our approach |
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How do we understand entity and environment (4) |
Analytical procedure Enquiry (internal) Inspection (internal controls) Observe |
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What's involved in understanding enitity environment (5) |
Nature of entity Industry, regulatory & external factors Internal control Objectives & strategies Entities financial performance |
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What is professional scepticism |
Questioning mind with evidence and being alert |
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Analytical procedures MUST be used at the risk assessment stage as a part of understanding entity and its environment |
G |
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How do u calculate return on capital employed, and what's the purpose |
(profit before tax and interest)/(TALCL) total assets less current liabilities Effective use of resources |
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How to you calculate gross profit margin |
How profitable you are |
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How do you calculate operating (Net) profit margin and what does it show |
Assessment of profitability |
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How and why we calculate current ratio |
Assess abilies ability to pay back current liabilities |
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How to calculate gearing and why |
Shows how much debt we have and how much we rely on external finances |
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How to calculate interest cover and what it shows |
Ability to pay back interest |
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When is a matter material |
When its ommision or misstatement could influence economic decisons of users based of the FS |
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When is risk and materiality considered (3) |
During planning stage when identifying and assessing During audit After audit when evaluating effects of uncorrected misstatements |
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What are the bounds for materiality |
Revenue 0.5-1% Assests (Total) 1-2% PBT(Profit before tax) 5-10% |
RAP |
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There are 2 bounds, if company is high risk then lower bounds are used. Low risk higher bounds |
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It's only material if it the percentage calculated is above the bounds of materiality |
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What is performance materiality |
Amount set by auditor less than materiality for FS |
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Transactions including directors are always material. Level of materiality is reviews constantly |
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What is the risk based approach |
Analyse the risks associated with clients business and direct their testing to risky areas |
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What is audit risk |
The risk that the auditor expresses inappropriate audit opinion when FS are materially misstated |
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What is inherent risk and give 4 examples |
A factor that increases the susceptibility of an assertion to material misstatement Cash based business Company being sold Management under pressure Estimates by management |
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What is control risk |
Risk that internal controls fail to prevent and detect material misstatement |
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What is control environment examples (3) |
Integrity and competence of employees Active role of management Existence of polices and procedures |
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Examples of control activities (5) |
Physical Authorisational Segregation of duties Performance reviews It Controls - passwords |
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What is detection risk and 2 examples |
Risk that audit fails to detect a material misstatement Sampling risk due to not testing whole population Non sampling risk Rush job/poor approach |
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What are the 4 steps an auditor takes |
1 identify risk by understanding entity environment 2 assess risk and relate them to what could go wrong 3 consider whether risks are big enough that could result material misstatement 4 design tests to respond to risks identified |
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Define fraud |
An intentional act that may results in FS being misstatement |
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Define error |
Unintentional |
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Describe fraudulent financial reporting |
Involves intentional misstatement or ommisions aiming to deceive user |
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Describe misappropriation of Assests |
Involves theft or misuse of entity's Assests |
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What are management responsibilities regarding fruad |
Preventing and detecting fraud and creatinf culture of honestly and ethical behaviour |
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What are auditors responsibilities regarding fraud (3) |
Identify risk of material misstatement due to fraud Design tests in response Respond to actual or suspected fraud. |
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How to calculate inventory and trade payable period |
Inventory/COS *365 and payables/COS*365 |
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How to calculate net assets turnover |
Revenue /capital employed |
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How to calculate quick ratio |
(Rec +current investment +cash) /current liabilities |
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How to calculate cost of sales percentage and operating cost percentage |
COS/Rev *100 OC/Rev *100 |
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What 2 tests do you do to gain evidence |
Test of controls Substantive procedure |
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What is test of controls and 2 examples |
Audit procedures designed to evaluate operating effectiveness of controls Observe and enquire |
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What are Substantive procedures |
Audit procedures designed to detect material misstatement at assertion level |
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What are included in substansive testing (2) |
Test of details Analytical procedures |
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What are test of details |
Looking at SPL account (classes of transactions) Looking at SFP (account balances) And related disclosures |
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What are procedures you can use to gain evidence |
Analytical procedures Enquiry Inspection Observation Recalculation |
AEIOU |
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What assertions are used for classes of transactions(SPL) for period under audit (6) |
Completeness Occurrence Cut-off Classification Accuracy Presentation |
COCCAP |
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What assertions are used for account balances (SFP) for at period end (5) |
Completeness Rights and obligations Allocation( Classification) Valuation Existence |
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What assertions are used for account balances (SFP) for at period end (5) |
Completeness Rights and obligations Allocation( Classification) Valuation Existence |
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Presentation in used in both SFP and SPL assertions as is completness |
G |
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Reasonable assurance is... |
Statutory audit Sufficient and Appropriate (intrusive) Internal control Then AEIOU to confirm assertions Positive - unqualified/unmodified opinion |
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Limited Assurance |
Review of cashflowSufficient and Appropriate Procedures are analytical and enquiry Negative - qualified/modified conclusion |
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What does true and fair mean in the context of the companies act (3) |
FS have been prepared properly FS have been prepared in line with financial framework Info in directiors report consistent with FS |
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Completeness is in both you test for understatement. From object to record |
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Occurrence is P&L Existence is SFP Both are being tested if they are overstated |
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Accuracy P&L Valuation SFP |
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Period under audit- SPL End of period is SFP |
Bl |
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What are the following things that you have to report if you find they have not been met. (report by exception) (5) |
Returns adequate for audit Agreement between FS and accounting records Proper accounting records have been kept Info and explanations have been received Directors emoluments correctly disclosed |
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What is included in audit report (16) |
Title Addresse Auditors opiniom Basis for opinion Conclusions Our approach Materiality applications Other info Opinions on company act matters Matters that we have to report by exception Directors responsibility Auditors responsibility Name and signature of engagement partner Auditors address Date of report |
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Info on assurance report (11) |
Title Addresse Description of subject matter Identification of criteria Assurance report only for intended user Identity responsible party ISAEs Sunnary Practitioner conclusion Report date Signed name of firm |
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